An Activist Battle Brews

In case you missed it on New Year's Day, activist investor Robert Chapman of Chapman Capital took a major shot across the bow of investor Bill Ackman: He announced that 35% of his fund's assets had been committed to a long position in Herbalife (HLF).

It's activist against activist.

On the surface, Ackman is the much better-known activist investor, so he would appear to have the upper hand. Yet no one should discount Chapman.

In Chapman's explanation for the position, he screams that the "perpetually sanctimonious" Ackman is the emperor without any clothes regarding his short position in the company.

Here's a summary of Chapman's views and the circumstances surrounding his newly established:

● Ackman has produced no smoking gun, despite 300-plus slides.

● The Federal Trade Commission has already looked into Herbalife for many years and has chosen not to do anything. Why would they now?

● Ackman has put 10% of his fund's assets at risk in this short -- more than $1 billion. This could lead to the mother of all short squeezes if the position starts to work against him. (Take the Volkswagen example of a few years ago, when a few hedge funds found themselves on the short end of the stick as the stock suddenly moved against them.)

● Herbalife has been around for a long time with few customer complaints.

● The company is producing a lot of cash and the shares are cheap. If management starts to buy back stock with that cash, this would hurt Ackman.

● Ackman chose the end of December to launch his attack, knowing that liquidity would be low and that management would be limited in how it could respond.

● Herbalife management will start to respond to Ackman's criticisms next week.

● Another famous activist investor, David Einhorn, looked into this stock earlier last year. If he is short the stock, he has yet to make a big deal of it. If not, why not?

The most interesting aspect of Chapman's position here is that he was a long in the stock 12 years ago, when he was decrying the company's executive compensation. He's no Johnny-come-lately here. He has spent years looking at the company in some detail. He concluded then that this wasn't a fraud, and he doesn't believe it now either.

The market woke up to Chapman's views Thursday, as Herbalife rocketed 12% on the day. Will the move continue? It certainly looks as though management will have its day in the sun next week. That means the stock is probably headed higher.

The shares are already back to levels where they'd been when Ackman gave his lengthy presentation against the company earlier in December.

The next few months should be fun to watch as Chapman and Ackman square off.

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